Little Book that Beats the Market

[Ash Housewares]

Reading Rich’s latest Pacific Capital post “US Stock Market Priced for Poor Returns” (see link at top right of this page) reminded me of a book I read about a year ago by Gleenblatt, a Columbia professor, called “The Little Book the Beats the Market”. It’s an easy read that can be completed in one sitting for those interested.

The jist of the book is that superior returns can be achieved by value investing. The particular flavor of value investing recommended by the book involves ranking stocks according to two factors- high return on capital and high earnings yield (inverse of PE), and buying the highest rated and holding for one year (sell winners just after one year, losers just before one year). He goes on for about 100 pages giving statistical evidence for the returns this method can achieve, which are large enough to raise a few eyebrows. He also claims that this technique is not susceptible to erosion by competitors trying to do the same thing, because results can be volatile and mutual funds are focussed on short term results, leaving this long term strategy available to small folks.

There is a yahoo group dedicated to this book, and they regularly post results, do back testing, and try to tweak the formula to get better results. Greenblatt also has a website (www.magicformulainvesting.com)- could he have chosen a worse name?- that is free and does the ranking for you with the most recent financials.

Does anyone have experience with this method? Or any thoughts on the book? I’m skeptical but would like to hear other’s opinions on this. I’d especially like to hear what Rich has to say, but understand he is constrained in what he can say on here.

[kewp]

Feh, maybe.

I’ve generated over 100% returns over the last year by using a technique I call ‘bubble riding’.

Basically, look for a speculative bubble and get long and liquid on it. When the tide shifts, go short.

I invested long commodities (including oil) a year ago and short the financial and RE sector. Long the commodities/energy bubble, short the housing bubble.

This is easy to do with indexed ETF’s, btw.

There is not much of weakness here other than getting the timing at least somewhat close. There is no surer bet than shorting a collapsing speculative bubble, IMHO. Mutual funds can’t sell short, btw, so you are basically scraping equity out of them.

One can even magnify the returns by using ‘Shannon’s Demon’ to harvest volatility. Bubbles are extremely erratic while collapsing due to short squeezes by the market makers and one can take advantage of the churn with active rebalancing.

A small primer on the Shannon method:

http://www.castrader.com/2006/10/the_shannon_met.html

Expect to get dinged for short-term capital gains, however!

[kewp]

Feh, maybe.

I’ve generated over 100% returns over the last year by using a technique I call ‘bubble riding’.

Basically, look for a speculative bubble and get long and liquid on it. When the tide shifts, go short.

I invested long commodities (including oil) a year ago and short the financial and RE sector. Long the commodities/energy bubble, short the housing bubble.

This is easy to do with indexed ETF’s, btw.

There is not much of weakness here other than getting the timing at least somewhat close. There is no surer bet than shorting a collapsing speculative bubble, IMHO. Mutual funds can’t sell short, btw, so you are basically scraping equity out of them.

One can even magnify the returns by using ‘Shannon’s Demon’ to harvest volatility. Bubbles are extremely erratic while collapsing due to short squeezes by the market makers and one can take advantage of the churn with active rebalancing.

A small primer on the Shannon method:

http://www.castrader.com/2006/10/the_shannon_met.html

Expect to get dinged for short-term capital gains, however!

[kewp]

Feh, maybe.

I’ve generated over 100% returns over the last year by using a technique I call ‘bubble riding’.

Basically, look for a speculative bubble and get long and liquid on it. When the tide shifts, go short.

I invested long commodities (including oil) a year ago and short the financial and RE sector. Long the commodities/energy bubble, short the housing bubble.

This is easy to do with indexed ETF’s, btw.

There is not much of weakness here other than getting the timing at least somewhat close. There is no surer bet than shorting a collapsing speculative bubble, IMHO. Mutual funds can’t sell short, btw, so you are basically scraping equity out of them.

One can even magnify the returns by using ‘Shannon’s Demon’ to harvest volatility. Bubbles are extremely erratic while collapsing due to short squeezes by the market makers and one can take advantage of the churn with active rebalancing.

A small primer on the Shannon method:

http://www.castrader.com/2006/10/the_shannon_met.html

Expect to get dinged for short-term capital gains, however!

[kewp]

Feh, maybe.

I’ve generated over 100% returns over the last year by using a technique I call ‘bubble riding’.

Basically, look for a speculative bubble and get long and liquid on it. When the tide shifts, go short.

I invested long commodities (including oil) a year ago and short the financial and RE sector. Long the commodities/energy bubble, short the housing bubble.

This is easy to do with indexed ETF’s, btw.

There is not much of weakness here other than getting the timing at least somewhat close. There is no surer bet than shorting a collapsing speculative bubble, IMHO. Mutual funds can’t sell short, btw, so you are basically scraping equity out of them.

One can even magnify the returns by using ‘Shannon’s Demon’ to harvest volatility. Bubbles are extremely erratic while collapsing due to short squeezes by the market makers and one can take advantage of the churn with active rebalancing.

A small primer on the Shannon method:

http://www.castrader.com/2006/10/the_shannon_met.html

Expect to get dinged for short-term capital gains, however!

[kewp]

Feh, maybe.

I’ve generated over 100% returns over the last year by using a technique I call ‘bubble riding’.

Basically, look for a speculative bubble and get long and liquid on it. When the tide shifts, go short.

I invested long commodities (including oil) a year ago and short the financial and RE sector. Long the commodities/energy bubble, short the housing bubble.

This is easy to do with indexed ETF’s, btw.

There is not much of weakness here other than getting the timing at least somewhat close. There is no surer bet than shorting a collapsing speculative bubble, IMHO. Mutual funds can’t sell short, btw, so you are basically scraping equity out of them.

One can even magnify the returns by using ‘Shannon’s Demon’ to harvest volatility. Bubbles are extremely erratic while collapsing due to short squeezes by the market makers and one can take advantage of the churn with active rebalancing.

A small primer on the Shannon method:

http://www.castrader.com/2006/10/the_shannon_met.html

Expect to get dinged for short-term capital gains, however!

[salo_t]

Ash Housewares, I recently read a book that uses a similar method and they also claim to have beaten the market for 20 years. Most have probably heard of it “The Motley Fools Investment Guide” they use what they call “The Dow dividend strategy” and you reassess your investments every year as well. This type of strategy is for long term investing. I’ve already implemented the strategy but right now with Oil out of control and such a volatile market I’m not sure how this year will play out.

[salo_t]

Ash Housewares, I recently read a book that uses a similar method and they also claim to have beaten the market for 20 years. Most have probably heard of it “The Motley Fools Investment Guide” they use what they call “The Dow dividend strategy” and you reassess your investments every year as well. This type of strategy is for long term investing. I’ve already implemented the strategy but right now with Oil out of control and such a volatile market I’m not sure how this year will play out.

[salo_t]

Ash Housewares, I recently read a book that uses a similar method and they also claim to have beaten the market for 20 years. Most have probably heard of it “The Motley Fools Investment Guide” they use what they call “The Dow dividend strategy” and you reassess your investments every year as well. This type of strategy is for long term investing. I’ve already implemented the strategy but right now with Oil out of control and such a volatile market I’m not sure how this year will play out.

[salo_t]

Ash Housewares, I recently read a book that uses a similar method and they also claim to have beaten the market for 20 years. Most have probably heard of it “The Motley Fools Investment Guide” they use what they call “The Dow dividend strategy” and you reassess your investments every year as well. This type of strategy is for long term investing. I’ve already implemented the strategy but right now with Oil out of control and such a volatile market I’m not sure how this year will play out.

[salo_t]

Ash Housewares, I recently read a book that uses a similar method and they also claim to have beaten the market for 20 years. Most have probably heard of it “The Motley Fools Investment Guide” they use what they call “The Dow dividend strategy” and you reassess your investments every year as well. This type of strategy is for long term investing. I’ve already implemented the strategy but right now with Oil out of control and such a volatile market I’m not sure how this year will play out.

[sdduuuude]

I follow the Motley Fool’s Mechanical Investment strategies for part of my IRA portfolio.

There are literally hundreds of “screens” that can be used to adjust a portfolio annually. The one you mention is one of those screens. The Motley Fool group does lots of back-casting on various methods and posts the screen results weekly for many of them.

I like this method because I spend minimal time investing. I spend about a day a year on my portfolio and readjust every January.

It has done well for me for several years.

Also, I don’t put all of my IRA money into a single strategy. I split it up into about 5 different parts.

Various parts are:
– commodities hedge fund.
– DOW
– Motley Fool Mechanical Investing Screen
– managed by Rich
– Berkshire
– Gold ETF
– Bonds

First and foremost, I am a believer in diversification. If you don’t spend alot of time on your portfolio, there is no substitute for diversification.

[sdduuuude]

I follow the Motley Fool’s Mechanical Investment strategies for part of my IRA portfolio.

There are literally hundreds of “screens” that can be used to adjust a portfolio annually. The one you mention is one of those screens. The Motley Fool group does lots of back-casting on various methods and posts the screen results weekly for many of them.

I like this method because I spend minimal time investing. I spend about a day a year on my portfolio and readjust every January.

It has done well for me for several years.

Also, I don’t put all of my IRA money into a single strategy. I split it up into about 5 different parts.

Various parts are:
– commodities hedge fund.
– DOW
– Motley Fool Mechanical Investing Screen
– managed by Rich
– Berkshire
– Gold ETF
– Bonds

First and foremost, I am a believer in diversification. If you don’t spend alot of time on your portfolio, there is no substitute for diversification.

[sdduuuude]

I follow the Motley Fool’s Mechanical Investment strategies for part of my IRA portfolio.

There are literally hundreds of “screens” that can be used to adjust a portfolio annually. The one you mention is one of those screens. The Motley Fool group does lots of back-casting on various methods and posts the screen results weekly for many of them.

I like this method because I spend minimal time investing. I spend about a day a year on my portfolio and readjust every January.

It has done well for me for several years.

Also, I don’t put all of my IRA money into a single strategy. I split it up into about 5 different parts.

Various parts are:
– commodities hedge fund.
– DOW
– Motley Fool Mechanical Investing Screen
– managed by Rich
– Berkshire
– Gold ETF
– Bonds

First and foremost, I am a believer in diversification. If you don’t spend alot of time on your portfolio, there is no substitute for diversification.

[sdduuuude]

I follow the Motley Fool’s Mechanical Investment strategies for part of my IRA portfolio.

There are literally hundreds of “screens” that can be used to adjust a portfolio annually. The one you mention is one of those screens. The Motley Fool group does lots of back-casting on various methods and posts the screen results weekly for many of them.

I like this method because I spend minimal time investing. I spend about a day a year on my portfolio and readjust every January.

It has done well for me for several years.

Also, I don’t put all of my IRA money into a single strategy. I split it up into about 5 different parts.

Various parts are:
– commodities hedge fund.
– DOW
– Motley Fool Mechanical Investing Screen
– managed by Rich
– Berkshire
– Gold ETF
– Bonds

First and foremost, I am a believer in diversification. If you don’t spend alot of time on your portfolio, there is no substitute for diversification.

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